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Professional Standards Manual

Trading Services

2. Acting For Sellers

(n) Disclosure of Illegal Activities

[June 2014: The following section was revised in the Professional Standards Manual]

If real estate has been used for the production of illegal substances, such as growing marijuana or as a methamphetamine laboratory, and the property has not been properly restored, a material latent defect may exist, in the form of toxic hazards that cannot be discovered on a reasonable examination of the property. While marijuana for medical purposes may be grown legally with the necessary licence, the possibility remains that its growth could result in a property defect.

If no disclosure has been made by the seller in this regard, the Council recommends that licensees acting for buyers encourage including the following clause in the contract of purchase and sale to confirm that the property has not been used to grow marijuana, whether legally or otherwise, or to manufacture illegal substances:

No Growth or Manufacture of Illegal Substances Clause (for use with non-strata properties)

The Seller represents and warrants that, during the time the Seller has owned the property, the property and the buildings and structures thereon have not been used for the growth of marijuana or manufacture of any illegal substances.  This warranty shall survive and not merge on the completion of this transaction.  Further, the Seller represents that, to the best of the Seller’s knowledge and belief, the property and the buildings and structures thereon have never been used for the growth of marijuana or manufacture of illegal substances.

If, however, the property has been used to grow marijuana or manufacture illegal substances, and the buyer is prepared to accept the condition of the property on an ‘as is’ basis, the Council recommends that

a) written disclosure of the property use by made to the buyer in a form separate from the Contract of Purchase and Sale; and

b) the following clause be included in the Contract:

Growth or Manufacture of Illegal Substances Clause (for use with non-strata properties)

The Buyer acknowledges that the property and the buildings and structures thereon may have been used for the growth of marijuana or manufacture of illegal substances, and acknowledges that the Seller makes no representations and/or warranties with respect to the state of repair of the premises. The Buyer accepts the property and the buildings and structures thereon in their present state, and in an ‘‘as is’’ condition.

§ NOTE: The use of this or a similar clause in the Contract of Purchase and Sale does not replace the requirement to have made such a disclosure on a separate document prior to the offer being accepted.

Licensees should also be aware that home warranty insurance may be void if it is found that illegal activity has occurred in the premises. The Homeowner Protection Act provides for certain permitted exclusions from warranty coverage due to, among other items, non-residential use, illegal activity (including marijuana growing operations) and failure to properly maintain the premises. Under some home warranty programs, current or subsequent owners may be impacted by exclusions from warranty coverage that are permitted by the Homeowner Protection Act and thus could void warranty insurance.

 

[August 2014: The following section was added to the Professional Standards Manual]

In the sale of a strata lot, except perhaps where the strata lot is part of a bare land strata corporation, a seller cannot be expected to have the knowledge about the property implied in the above clause.

Licensees may find the following adapted versions of the clauses useful in the sale of strata lots.

The Council recommends that licensees use the following clause to confirm that the strata lot has not been used to grow marijuana, whether legally or otherwise, or to manufacture illegal substances:

No Growth or Manufacture of Illegal Substances Clause (for use with strata lots)

The Seller represents and warrants that, during the time the Seller has owned the strata lot, neither the strata lot nor any limited common property associated with the strata lot has been used for the growth of marijuana or manufacture of any illegal substances. This warranty shall survive and not merge on the completion of this transaction. Further, the Seller represents that, to the best of the Seller’s knowledge and belief, neither the strata lot nor any limited common property associated with the strata lot has ever been used for the growth of marijuana or manufacture of illegal substances.

If, however, the strata lot has been used to grow marijuana or manufacture illegal substances, and the buyer is prepared to accept the condition of the property on an ‘as is’ basis, the Council recommends that:

a) the seller make a written disclosure to the buyer in a form separate from the Contract of Purchase and Sale; and

b) the following clause be included in the Contract:

 

Growth or Manufacture of Illegal Substances Clause (for use with strata lots)

The Buyer acknowledges that the strata lot or limited common property associated with the strata lot has been used for the growth of marijuana or manufacture of illegal substances, and acknowledges that the Seller makes no representations and/or warranties with respect to the state of repair of the strata lot or the limited common property associated with the strata lot. The Buyer accepts the strata lot in its present state, and in an ‘‘as is’’ condition.

§NOTE: The use of this or a similar clause in the Contract of Purchase and Sale does not replace the requirement to have made such a disclosure on a separate document prior to the offer being accepted.

Licensees should also be aware that many financial institutions have lending restrictions they may apply to properties that have been used for growing marijuana or the manufacture of illegal substances.

 

Licensees should also be aware that home warranty insurance may be void if it is found that illegal activity has occurred in the premises. The Homeowner Protection Act provides for certain permitted exclusions from warranty coverage due to, among other items, non-residential use, illegal activity (including marijuana growing operations) and failure to properly maintain the premises. Under some home warranty programs, current or subsequent owners may be impacted by exclusions from warranty coverage that are permitted by the Homeowner Protection Act and thus could void warranty insurance.